СТАТИСТИКА 1 / Банк Англии / 2006full

Budget plans for 2006/07 imply a small surplus (£5.5 million) for remunerated functions, consistent with the aim that income should cover costs, subject to reasonable charges to customers.

Underpinning spending plans for policy and remunerated functions are investment proposals of around £20 million a

year. These are planning assumptions — all projects have to go through a separate approval process as part of the Bank’s Project Framework. The table below shows proposals for major projects (more than £0.5 million) of strategic importance.

REMUNERATION POLICY

The Remuneration Committee’s approach is to review salaries annually, aiming to set remuneration and conditions of service to reflect adequately the relevant labour market supply and demand factors and individual performance. In addition to recommending salary levels, the Committee may recommend the payment of bonuses as a means of rewarding special services or personal performance. In proposing salary and bonuses, the Committee takes appropriate account of both internal and external salary comparisons in so far as these bear upon the supply of and demand for the requisite skills. Where relevant, the Committee commissions external advice on the levels of pay and benefits in the light of the above criteria. However, in advising Court on remuneration at senior levels within the Bank, it also bears in mind the Bank’s position within the public sector. When a new appointment is made, the Committee also considers the pension benefits to be provided. Although no executive member of Court sits on the Committee, the Governor may be invited to attend meetings that do not consider his own remuneration. The Chairman of NedCo may also attend meetings.

REMUNERATION STRUCTURE FOR THE GOVERNORS

The remuneration arrangements for the Governor and Deputy Governors are:

Base salaries

The salaries of the Governor and Deputy Governors are set on appointment in consultation with the Treasury.

The Governor, Mervyn King, is serving a five-year term that began on 1 July 2003. The Governor’s remuneration is customarily reviewed each year on the anniversary of his appointment; from 1 July 2005 his salary was increased by 21/2% from £269,899 to £276,647.

The Deputy Governors’ salaries have been reviewed in line with the remuneration policy described above. From 1 March 2005, the salary of both Deputy Governors was increased by 21/2% from £223,168 to £228,748; Sir John Gieve was appointed to this salary when he succeeded Sir Andrew Large as Deputy Governor with effect from 16 January 2006.

Benefits

The Remuneration Committee also keeps under review other benefits available to the Governors. The Governor and Deputy Governors do not receive the full additional benefit allowance available to staff, but medical insurances are provided and these, together with pension entitlements, were the principal non-salary benefits received during the year to 28 February 2006.

Post-retirement benefits

Post-retirement benefits are initially provided through the Court Pension Scheme, supplemented by an unfunded scheme. This is separate from the scheme for staff, and is described on page 32.

Service contracts

The Governor and Deputy Governors are each appointed by the Crown for five-year terms; they may be re-appointed. Other than the pension arrangements described below and a period of three months’ continued employment by the Bank when they cease to be members of the MPC, the Governors have no termination provisions at the end of their appointments.

Under the Bank of England Act 1998, Governors are required to provide remunerated services to the Bank only. With Court’s approval other directorships relevant to the Bank’s work may be accepted, but any fees must be paid to the Bank. The only

such directorship held during the past year has been the appointment to the FSA Board held by Sir Andrew Large until 15 January 2006 and Sir John Gieve from 16 January 2006.

REMUNERATION OF DIRECTORS

The Bank of England Act 1998 provides for the remuneration of the non-executive Directors to be determined by the Bank with the approval of the Chancellor of the Exchequer. The remuneration of the non-executive Directors is £6,000 per annum; the remuneration of non-executive Directors who

Remuneration of Members of Court

Governor

Mr M A King

Joined 1 March 1991

Deputy Governors

Sir A M B Large

Joined 3 September 2002

Retired 15 January 2006 (Note i)

Ms J R Lomax

Joined 1 July 2003

Sir E J W Gieve

Joined 1 January 2006 (Note ii)

Non-executive Directors

Bank of England Annual Report 2006

chair the Remuneration Committee, the Audit Committee, the Risk Policy and the Trustee Boards of either of the Bank’s occupational pension schemes is £9,000 per annum; and the remuneration of the Chairman of non-executive Directors is £12,000 per annum. Non-executive Directors do not receive any post-retirement benefits from the Bank. Other than the Chairmen of the Committees of Court, Directors receive no additional fees for serving on those Committees. The Bank does however meet appropriate travel and subsistence expenses.

PENSIONS OF THE GOVERNOR AND DEPUTY GOVERNORS

The Court Pension Scheme, in which the Governors participate, is a non-contributory occupational pension scheme. Executive Directors are also members of the scheme. The normal retirement age is 60, and the accrual rate allows members to achieve a maximum pension of two thirds of their pensionable salary at normal retirement age after 20 years’ service. The scheme also provides for early retirement in certain circumstances (including ill-health), payment of a lump sum of four times pensionable salary in the event of death in service, allowances for a spouse’s or civil partner’s pension of 60% of the member’s base pension, and discretionary allowances for dependants. Pensions and deferred pensions are reviewed annually and are normally increased in line with the rise in the Retail Prices Index.

For Governors subject to the pensions earnings cap introduced in the Finance Act 1989, the Bank is contracted to provide additional unfunded pensions so that their total pensions broadly match what would have been provided by the Court Scheme in the absence of the cap. During the year ended 28 February 2006, unfunded entitlements were

provided for Mr King, Sir Andrew Large and Ms Lomax. Provision for these unfunded benefits is made in the Bank’s financial statements.

The Remuneration Committee has considered the impact on the pension arrangements for members of the Bank’s Executive of the introduction of the Lifetime Allowance from April 2006. Mr King and Ms Lomax, who have been subject to the 1989 pensionable earnings cap, will continue to accrue pension entitlements in both the Court Pension Scheme and by way of unfunded benefits

Unfunded pension benefits will not be granted in future. Instead, on reaching the Lifetime Allowance, members will have the opportunity to opt out of accrual in the Court Pension Scheme, and to receive a salary supplement in lieu, on a basis that is cost neutral to the Bank.

REMUNERATION OF MONETARY POLICY COMMITTEE MEMBERS

The Bank of England Act 1998 requires NedCo to determine the terms and conditions of service of the four members of the MPC appointed by the Chancellor of the Exchequer.

GOVERNANCE OF THE BANK

The role of the Court of Directors and its Committees, and the names of the members of the Court of Directors, together with the principal outside appointments of the non-executive Directors, are given on pages 8–11.

STATEMENT OF THE RESPONSIBILITIES OF THE COURT OF

DIRECTORS IN RELATION TO THE FINANCIAL STATEMENTS

The Court of Directors is responsible for ensuring that the financial statements, as prepared on the basis set out therein, present fairly the state of affairs of the Banking Department as at 28 February 2006 and of the profit for the year to that date. The statements of account of the Issue Department are prepared in accordance with provisions agreed between the Bank and HM Treasury to implement the requirements of the Currency and Bank Notes Act 1928 and the National Loans Act 1968. The Court of Directors is responsible for ensuring that the statements of account are prepared in accordance with these requirements.

The Court of Directors is responsible for ensuring proper accounting records are kept, which disclose at any time the financial position of the Bank and enable Court to ensure that the financial statements comply with the requirements set out in note 2 thereto. The Court of

Directors is also responsible for safeguarding the assets of the Bank and its subsidiaries, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Court of Directors confirms that suitable accounting policies, consistently applied and supported by reasonable and prudent judgement and estimates, have been used in the preparation of the financial statements of the Banking Department. The accounting framework adopted is set out on pages 54–62.

PRINCIPAL ACTIVITIES AND REVIEW OF OPERATIONS

The Bank’s core purposes are set out on page 3. The Governor’s Foreword, the Review of 2005/06 and the Financial Review give a detailed account of the Bank’s activities and operations during the year.

PRESENTATION OF THE FINANCIAL STATEMENTS

The Bank Charter Act 1844 requires that the Bank’s note issue function be separated from its other activities. Accordingly, for accounting purposes, the Bank is divided into ‘Issue’ and ‘Banking’. The Issue Department is solely concerned with the note issue, the assets backing the issue, the income generated by those assets and the costs incurred by the Bank in printing, issuing, sorting and destroying notes. The entire profit of the note issue is paid over to

HM Treasury.

The Banking Department comprises all the other activities of the Bank. The post-tax profits of Banking Department are shared equally with HM Treasury unless the Bank and

HM Treasury agree otherwise.

The Issue Department and the Banking Department are accounting designations — neither is an organisational unit of the Bank.

Banking Department

In preparing the financial statements of the Banking Department, the Bank, under the Bank of England Act 1998, is subject to requirements corresponding to the Companies Act requirements relating to a banking company. The Bank may, however, disregard a requirement to the extent that it considers it appropriate to do so, having regard to its functions. The Companies Act permits UK incorporated companies to prepare their financial statements either in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS) or in accordance with UK Generally Accepted Accounting Principles (UK GAAP). The Bank has chosen to adopt the recognition and measurement requirements of IFRS together with the presentation and disclosure framework explained below.

IFRS and the Companies Act have been used as a model for the presentation and disclosure framework to provide additional information and analysis of key items in the financial statements except insofar as the Bank considers certain disclosures inappropriate to its functions.

In exceptional circumstances, as part of its central banking functions, the Bank may act as ‘lender of last resort’ to financial institutions in difficulty, in order to prevent a loss of confidence spreading through the financial system as a whole. In some cases, confidence can best be sustained if the Bank’s support is disclosed only when the conditions giving rise to potentially systemic disturbance have improved. Accordingly, although the financial effects of such operations will be included in the Department’s financial statements in the year in which they occur, these financial statements may not explicitly identify the existence of such support. However, the existence of such support will be disclosed in the Annual Report when the need for secrecy or confidentiality has ceased.

As a result, the Bank’s financial statements disclose less detail of certain elements than would be required under either IFRS or UK GAAP. Disclosure limitations include:

●Constituent elements of the income statement.

●Note disclosures for income and expenses, particularly relating to net interest income and provisions.

●Related disclosures in the balance sheet, cash flow statement and notes to the financial statements.

●Business segments.

●Contingent liabilities and guarantees.

The Bank has adopted the new accounting framework outlined above with effect from 1 March 2004 and has followed the transitional provisions set out in IFRS 1 (First-time Adoption of IFRS) which is applied by entities using IFRS for the first time. Further details regarding the adoption of the framework is provided in note 2(a) ‘Form and presentation of the financial statements’.

Issue Department

The statements of account of the Issue Department are prepared in accordance with the requirements of the

Bank of England Annual Report 2006

Currency and Bank Notes Act 1928 and the National Loans Act 1968.

FINANCIAL RESULTS

The Banking Department’s financial statements for the year ended 28 February 2006 are given on pages 50–109, and show a profit after provisions and before tax of £99 million on the new accounting basis (2004/05: £106 million). After a tax charge of £19 million (2004/05: £37 million), on which there is tax relief of £14 million (2004/05: £11 million) and a payment in lieu of dividend of £47 million (2004/05:

£38 million), the profit transferred to reserves amounts to £47 million (2004/05: £42 million).

The statements of account for the Issue Department (which are given on pages 110–112) show that the profits of the note issue were £1,698 million (2005/06: £1,618 million). These profits are all payable to HM Treasury. In accordance with the Currency and Bank Notes Act 1928, the assets of the Issue Department comprise securities sufficient to cover the fiduciary note issue.

Balance sheets

The Bank has adopted the accounting framework previously outlined for Banking Department with effect from 1 March 2004 and has followed the transitional provisions set out in IFRS 1 which is applied by entities adopting IFRS for the first time. In accordance with the exemptions in IFRS 1, IAS 32 (Financial Instruments: Disclosure and Presentation) and

IAS 39 (Financial Instruments: Recognition and Measurement) have only been applied from 1 March 2005 and therefore comparative amounts for financial instruments in respect of the year ended 28 February 2005 remain on a UK GAAP basis.

Reconciliations of the new accounting framework to UK GAAP and explanations of the differences are set out in note 33 for:

●Profit before and after tax for the year ended 28 February 2005.

●Net assets as at 1 March 2004, 28 February 2005 and 1 March 2005.

At 28 February 2006 around £3.2 billion of Banking Department’s assets comprised sterling money market refinancing provided through the Bank’s open market operations (2005: £2.4 billion).

The size of the Banking Department’s balance sheet is affected by the size of the Issue Department’s deposit with Banking Department. On most days, this is around

£50 million but it can be larger if settlement banks make significant use of the Bank’s settlement bank late repo facility, which is always allocated to Banking Department and may be partly funded by an increase in Issue Department’s Deposit.

During the year there was an increase in sterling and foreign currency deposits taken from central banks, and banks and building societies. At 28 February 2006 total deposits from central banks were £11.4 billion (2005: £9.8 billion) and from banks and building societies £3.2 billion (2005:

£2.3 billion).

On 27 January 2006 one of the Bank’s three-year euro-denominated Notes (originally issued in 2002) matured. Over the financial year the bank auctioned the

€1,000 million second tranche of the Note maturing on 28 January 2008. In addition the Bank also created

€3,300 million of Euro Notes maturing on 27 January 2009, for issue via auction. The first €2,200 million was auctioned on 24 January 2006 with the auction of the second

€1,100 million tranche taking place shortly after the end of the financial year, on 28 March 2006. The proceeds of the issue of the Notes have been invested in foreign currency assets together with related swaps so as to minimise exposure to interest rate and currency risk.

The nature of the Issue Department balance sheet has changed little over the year. The assets matching the note issue remain largely similar to previous years and include the

stock of sterling market operations (principally reverse repos of government securities) and the Ways and Means advance to HM Treasury, which has been unchanged at £13.4 billion since April 2000.

Consolidated Balance Sheet

The separation of Banking from Issue in the Accounts is required by statute. A summary consolidated Bank balance sheet as at 28 February 2005 is set out on page 37.(1) It is provided for information purposes only, to assist comparison with other central banks.

The growth in total liabilities during the year was driven by two key factors. Firstly, at the balance sheet date, notes in circulation had increased to £37 billion (2005: £35 billion). Notes were matched by reverse repos of £24 billion (2005: £21 billion) and the Ways and Means advance of £13 billion

(2005: £13 billion).

Secondly, sterling deposits from central banks, rose from £3.0 billion in 2005 to £4.5 billion in 2006; although foreign currency deposits remained relatively constant at £6.9 billion (2005: £6.8 billion). Within assets, there were year-on-year increases in foreign currency reverse repos from £3.9 billion to £4.7 billion, in sterling deposits placed out via foreign currency swaps from £1.5 billion to £1.7 billion, and in deposits placed out in open market operations from

£2.4 billion to £3.2 billion.

PAYMENT IN LIEU OF DIVIDEND TO HM TREASURY

The Bank of England Act 1946, as amended by the Bank of England Act 1998, requires the Bank to pay to HM Treasury, in lieu of dividend on the Bank’s capital, on 5 April and on 5 October, a sum equal to 25% of the Bank’s post-tax profit for the previous financial year or such other sum as the Bank and HM Treasury may agree. The overall effect is that the Bank and HM Treasury will normally share post-tax profits

equally. Accordingly the Bank paid £20 million in April 2005

Summary consolidated balance sheet

Assets

Treasury and other bills

Ways and Means advance

Loans and advances

Financial assets designated at fair value through profit or loss Debt securities

Derivatives financial instruments

Available for sale securities

Other assets

Total assets

Liabilities

Notes in circulation

Deposits

Derivatives financial instruments

Debt securities in issue

Financial assets designated at fair value through profit or loss Other liabilities

Capital and reserves

Total liabilities

and £18 million in October 2005 in respect of the year to 28 February 2005. In April 2006 the Bank paid the first payment of £23 million in respect of the financial year ended 28 February 2006 which was based on provisional

figures. The balance of £24 million will be paid on 5 October 2006.

RISK MANAGEMENT

The Bank’s activities require it to identify, assess and manage a wide range of risks effectively. The Bank’s risks are managed through a framework that relates the policy and structure of risk management to the Bank’s strategy and objectives. The framework identifies the roles and responsibilities of key parties in the risk management process and applies to all categories of risk.

Developments in 2005/06

During the financial year, the Risk Oversight Unit (formerly known as the Risk Standards Unit) took forward the work begun in the previous period to develop a Bank-wide risk strategy, implement the new risk framework and communicate the essentials of the approach to staff.

Specifically, progress was made to establish documented Bank Risk Standards for each category of risk. The standards are a way of defining the nature of particular categories of risk, the guiding principles for control mechanisms that can be put in place to mitigate them, and the indicators that can both track risk on a day-to-day basis and also help us establish our risk tolerance. During 2005, 8 (out of a total of 12) standards were approved by the risk committees and Court for

publication within the Bank. The remaining work related to Risk Standards will be completed by June 2006.

The Risk Oversight Unit also revised the Turnbull annual risk assessment process during 2005. This was enhanced across the Bank and resulted in a more focused review of the material risks. Revised assessment criteria were developed and implemented, designed to simplify the process and promote consistency.

The Bank recognises that the risk policy documentation it has delivered is just one element of an effective risk strategy and framework. The progress made to deliver Risk Standards and the enhancements made to the Turnbull process have provided a platform upon which to continue to improve the Bank’s risk framework. 2006 will see more focus on enhancing the Bank’s approach to risk reporting, which will improve the assurance provided to senior management (especially Court) within the Bank. The plans to deliver this include:

1The provision of a risk reporting information pack for Business Risk Committee, Risk Policy Committee, Executive Team and Court, which is aligned to the Bank’s strategy and objectives.

2A revision of Bank-wide guidelines on event/incident capture and reporting, to improve consistency and completeness of information.

3Embedding the reporting process across the Bank, so that it becomes the vehicle for delivering assurance to Court for approval of Combined Code of Corporate Governance (Turnbull).

4Developing a more effective link between the Bank’s key risk exposures and the business planning process.

One of the Risk Oversight Unit’s priorities is to ensure that all members of staff have the opportunity to learn more about the Bank’s approach to risk management. During 2005 a short leaflet was produced, explaining the basic concepts and

stressing the key message that each employee has a responsibility for being aware of, and understanding, the risks faced in relation to the activities and processes under his/her stewardship. Further risk publications for staff are planned for 2006/07.

This work is overseen by the Business Risk Committee, which considers the practical implementation of risk policy and the degree of risk tolerance, and is chaired by a Deputy Governor; and the Risk Policy Committee, which is a committee of Court structured on a similar basis to the Audit Committee, with some common membership to ensure a effective dialogue and flow of information. The staffing of the Risk Oversight Unit was further strengthened in late 2005 with the recruitment of two risk specialists with extensive experience of risk management in financial institutions.

Operational and Non-Financial Risk

Operational risk may arise directly or indirectly through inadequate internal processes, accounting, human error, systems or business continuity failures, fraud or inadequate legal and other documentation. More specific to the central bank’s role, there are also a number of policy and analytical non-financial risks arising from the processing, analysis and modelling of data, and the assessment of the external environment, all of which could have an impact on the Bank’s ability to implement its objectives effectively.

As a central bank, the Bank faces risks that arise in the pursuit of its two core purposes. Across all of the key objectives that underpin the two core purposes, the Bank faces operational and non-financial risks. For example, it is vital that the economic analysis and forecasts that underpin the decisions on interest rates taken at the monthly meetings of the Monetary Policy Committee are based on accurate economic data and robust financial models. Similarly, the responsibility for maintaining confidence in the note issue requires that strict standards of banknote design and printing quality are applied, given that the crystallisation of the risk of widespread counterfeiting would be very serious. To operate effectively, the Bank needs to maintain a high level of public confidence. Shortcomings in any of these areas